Regis Reports Second Quarter 2013 Results

MINNEAPOLIS--(BUSINESS WIRE)-- Regis Corporation (NYS: RGS) , a leader in the haircare industry, whose primary business is owning, operating and franchising hair salons, today reported results for its fiscal second quarter ended December 31, 2012 versus the prior year as noted below. References made to discrete items were formerly referred to as non-operational items in previous earnings releases, and references made to financial measures, as adjusted, were formerly referred to as operational measures in previous earnings releases.

  • Sales of $506.2 million, a decrease of 3.8 %. Same-store sales declined 1.9%.
  • GAAP net loss of $12.3 million. GAAP net loss including discontinued operations per diluted share (Diluted EPS) of $0.22.
  • Diluted EPS, as adjusted, of $0.03 compared to $0.27.
    • Current year earnings were reduced by approximately $0.05 per share, representing increased labor costs, primarily associated with increased stylist hours, impacts of Hurricane Sandy and reduced equity in earnings of Empire Education Group, partly offset by reductions in general & administrative expenses.
    • Prior year earnings were increased by $0.10 per share, representing equity in earnings of Provalliance (sold in the current year first quarter) and tax benefits primarily from the realization of employment tax credits.
  • EBITDA, as adjusted, of $31.1 million compared to $43.7 million.
    • Current year was reduced by approximately $8.9 million due to increased labor costs, primarily associated with increased stylist hours and impacts of Hurricane Sandy.
    • Current year was improved by $6.1 million of reductions in general and administrative expenses, as adjusted, representing an 80 basis point decline as a percentage of revenues.
  • The current year quarter includes net discrete after-tax expense of $14.0 million, primarily related to impairment of our investment in Empire Education Group, partly offset by earnings from discontinued operations. The prior year quarter includes $73.8 million of net discrete after-tax expense.
  • All periods presented reflect the reclassification of our Hair Restoration segment to discontinued operations. During the current quarter, the Hair Restoration segment generated earnings of $0.07 per diluted share.

"Second quarter results reflect conscious decisions we've made to invest in our business to drive traffic," said Dan Hanrahan, President and Chief Executive Officer. "We made the decision to increase salon hours, primarily in our SmartStyle salons located in Walmart and our Supercuts salons. We knew this decision would impact gross margins, but we believed increasing hours would help stem continued declines in guest traffic. By adding hours, we are beginning to see improvements in guest traffic, especially in our SmartStyle and Supercuts businesses. Service traffic in SmartStyle was up over 4% for the quarter compared to the same period last year, and for the first time in thirteen consecutive quarters, SmartStyle posted positive same-store service sales. Overall, same-store sales trends improved 120 basis points compared to the first quarter of this fiscal year."


Mr. Hanrahan continued, "While this investment currently reduced gross margins, we are continuing to focus on scheduling optimization, so that in the back half of this year our margins will be less impacted by increased hours. Scheduling optimization is in its early stages, and we are working diligently to strike the proper balance between staffing and guest traffic. Preliminary January findings indicate this gap may be narrowing in a number of our Supercuts salons, giving me confidence we can and will continue to improve during the remainder of our fiscal year.

"On a positive note, we continued to drive expense out of the business. General and administrative expenses, as adjusted, were reduced by over $6 million compared to the same quarter last year. While we expect our general and administrative run rate to continue in the second half, we continue to focus on areas of the business that can drive further cost efficiencies."

Mr. Hanrahan concluded, "We are in the early stages on several initiatives focused on creating an ideal guest experience that drives loyalty and repeat business, developing, retaining and attracting the best stylists and optimizing our brand portfolio. Changing the strategic direction of any established business requires investment, execution and time. After six months in this role, I remain extremely confident about our ability to improve Regis' performance and the entire organization shares my sense of urgency to achieve that goal."

 
Comparable Profitability Measures (1)
 
  Three Months Ended   Six Months Ended   Fiscal Years Ended
December 31, December 31, June 30,
2012   2011 2012   2011 2012   2011
(Dollars in Millions)
Revenue $ 506.2 $ 526.1 $ 1,011.5 $ 1,057.5 $ 2,122.2 $ 2,180.2
 
Revenue growth (decline) % (3.8 ) (2.3 ) (4.3 ) (2.1 ) (2.7 ) (1.6 )
 
Same-Store Sales % (1.9 ) (3.3 ) (2.5 ) (3.4 ) (3.5 ) (1.9 )
Same-Store Average Ticket % Change 0.5 (0.9 ) (0.2 ) (0.4 ) (0.6 ) 1.0
Same-Store Guest Count % Change (2.4 ) (2.4 ) (2.3 ) (3.0 ) (2.9 ) (2.9 )
 
Gross Margin % (2) 41.7 44.2 42.1 44.4 44.2 44.1
Service Margin % (2) 39.7 42.7 40.3 43.0 42.7 42.6
Product Margin % (2) 49.1 49.5 48.6 49.9 49.6 49.7
 
Site operating expense as % of total revenues, U.S. GAAP reported 9.9 9.8 10.1 10.0 9.8 9.7
Site operating expense as % of total revenues, as adjusted 10.1 9.8 10.2 10.0 9.7 9.7
 
General and administrative as % of total revenues, U.S. GAAP reported 11.0 11.9 11.0 12.2 11.8 13.1
General and administrative as % of total revenues, as adjusted 10.8 11.6 11.0 11.7 11.0 11.3
 
Operating income (loss) as % of total revenues, U.S. GAAP reported 1.7 2.3 1.8 2.0 (0.1 ) (0.7 )
Operating income as % of total revenues, as adjusted 1.7 3.8 1.7 3.8 4.6 4.5
 
EBITDA 17.4 (21.2 ) 86.3 26.5 14.7 101.3
EBITDA, as adjusted 31.1 43.7 61.5 87.6 191.4 195.3
 
    1)   As of September 30, 2012, the Company classified the results of operations of the Hair Restoration Centers as discontinued operations. Beginning with the first quarter ended September 30, 2012, the Company reclassified certain salon marketing and advertising expenses that were previously within cost of service and general and administrative expense to site operating expense. All periods presented reflect the Hair Restoration segment operations as discontinued operations and the reclassifications that were made during the quarter ended September 30, 2012.
2) Excludes depreciation and amortization.
 

Second Quarter Results:

Revenues. Revenues for the quarter declined $20.0 million, or 3.8%, compared to the prior year quarter.

Salon revenues during the quarter were $496.5 million, a decrease of $20.4 million, or 3.9%, from the prior year quarter, mainly driven by declines in North American salons. North American service revenues for the quarter were $364.5 million, a decrease of $15.2 million, or 4.0%, compared to the same period last year. Compared to the prior year quarter, North American same-store service sales declined 1.5%, comprised of a 2.2% decrease in guest counts and 0.7 % increase in average ticket price. Management estimates that lost business from Hurricane Sandy negatively impacted same-store service sales by approximately 30 basis points. Net changes in store counts drove the remaining 2.5% decrease compared to the prior year quarter.

Product revenues for the quarter were $108.2 million, a decrease of $4.7 million, or 4.1% versus the same period last year. Product same-store sales declined 3.6%.

Royalties and fees for the quarter of $9.6 million increased $0.4 million, or 4.7%, versus the prior year quarter.

Gross Margin. Gross margin as a percent of service and product revenues for the second quarter decreased 250 basis points to 41.7% compared to the prior year quarter.

Service margin as a percent of service revenues for the quarter was 39.7%, a decline of 300 basis points compared the prior year quarter, primarily related to increased salon labor costs in North American salons. The increase in salon labor costs was due the Company's decision to increase stylist hours to drive traffic. Hours increased at a faster rate than same-store service sales. The Company is in the early stages of implementing a scheduling optimization tool which will help align changes to salon hours with changes in guest traffic. Product margin as a percent of product revenues for the quarter was 49.1%, a decline of 40 basis points compared to the prior year quarter, in part, driven by product donations for Hurricane Sandy relief efforts.

Site Operating Expenses. Site operating expenses for the quarter of $49.9 million, or 9.9% of revenues, declined by $1.6 million or 3.1% compared to the same quarter last year. Excluding the impact of discrete items, site operating expenses, as adjusted, for the quarter of $51.0 million, or 10.1% of revenues, a decrease of $0.5 million, or 0.9%, compared to the same quarter last year. The decrease in expense was primarily driven by the fact that we were lapping a marketing event in the prior year that was not repeated in the current year, partly offset by increased communication and insurance costs.

General and Administrative. General and administrative expenses for the quarter of $55.8 million, or 11.0% of revenues, decreased $6.8 million, or 90 basis points, compared to the same quarter last year. Excluding the impact of discrete items, general and administrative expenses, as adjusted, for the quarter decreased $6.1 million, or 9.9%, compared to the same quarter last year, representing an 80 basis point decline as a percent of revenues. This reduction was driven by cost saving initiatives the Company put in place to simplify and become efficient in supporting salon operations. We expect general and administrative run rates to continue in the second half and we continue to focus on simplification to drive further cost efficiencies.

Rent. Rent expense for the quarter was $80.6 million, or 15.9% of revenues, representing an increase of 10 basis points over the same quarter last year, primarily the result of negative leverage due to decreases in same-store sales. Rent expense actually declined by $2.7 million, or 3.2%, compared to the same quarter last year, due to store closures.

Depreciation and Amortization. Depreciation and amortization for the quarter was $21.9 million, or 4.3% of revenues, compared to $28.4 million, or 5.4% of revenues in the prior quarter. Excluding the impact of discrete items in the prior year quarter, depreciation and amortization was essentially flat versus the prior year quarter.

Income Taxes. During the three months ended December 31, 2012, the Company recognized tax expense of $1.1 million at an effective tax rate, as adjusted, of 40.6%. The Company's tax rate, as adjusted, came in higher than the rate of 21.6% for the prior year quarter primarily due to the prior year rate benefiting from employment tax credits.

Equity in Affiliates. Loss from equity method investments and affiliated companies was $17.7 million in the second quarter of fiscal 2013, which included a net discrete impairment charge of $17.9 million related to Empire Education Group. Income from equity method investments and affiliated companies, as adjusted, was $0.2 million, a decrease of $4.9 million over the second quarter of fiscal 2012. The reduction in earnings, as adjusted, is the result of the Company's sale of its investment in Provalliance and reduced earnings at Empire Education Group due to declining student enrollment.

EBITDA. EBITDA for the quarter of $17.4 million increased by $38.6 million, or 181.7%, compared to the prior year quarter. Excluding the impact of discrete items, EBITDA, as adjusted, for the quarter of $31.1 million decreased by $12.6 million, or 28.9% compared to the prior year quarter.

Discrete Items. Discrete expense for the current quarter netted to $14.0 million on an after-tax basis, and consisted of the following after-tax items:

  • After-tax non-cash impairment charge of $17.9 million related to the Company's investment in Empire Education Group.
  • Senior management restructuring costs of $0.6 million after-tax related to severance.
  • Self-insurance reserve benefit of $0.7 million after-tax primarily related to an actuarial adjustment to prior years' workers' compensation reserves.
  • Earnings from discontinued operations of $3.9 million after-tax related to the Company's Hair Restoration segment.

A complete reconciliation of reported earnings to adjusted earnings is included in this press release and is available on the Company's website at www.regiscorp.com.

Regis Corporation will host a conference call discussing second quarter results today, January 31, 2013, at 10 a.m., Central time. Interested parties are invited to listen by logging on to www.regiscorp.com or dialing 877-941-8609. A replay of the call will be available later that day. The replay phone number is 800-406-7325, access code 4590684#.

About Regis Corporation
Regis Corporation (NYS: RGS) is the beauty industry's global leader in beauty salons, hair restoration centers and cosmetology education. As of December 31, 2012, the Company owned, franchised or held ownership interests in approximately 10,000 worldwide locations. Regis' corporate and franchised locations operate under concepts such as Supercuts, Sassoon Salon, Regis Salons, MasterCuts, SmartStyle, Cost Cutters, Cool Cuts 4 Kids and Hair Club for Men and Women. Regis maintains ownership interests in Empire Education Group in the U.S. and the MY Style concepts in Japan. For additional information about the company, including a reconciliation of certain non-GAAP financial information and certain supplemental financial information, please visit the Investor Information section of the corporate website at www.regiscorp.com. To join Regis Corporation's email alert list, click on this link: http://www.b2i.us/irpass.asp?BzID=913&to=ea&Nav=1&S=0&L=1

This press release may contain "forward-looking statements" within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. The forward-looking statements in this document reflect management's best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, "may," "believe," "project," "forecast," "expect," "estimate," "anticipate," and "plan." In addition, the following factors could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include the impact of management and organizational changes; the Company's dependence on same-store sales increases to increase revenue; the impact on the Company of healthcare reform legislation; competition within the personal hair care industry, which remains strong, both domestically and internationally; price sensitivity; changes in economic conditions; changes in consumer tastes and fashion trends; the ability of the Company to implement its planned spending and cost reduction plan and to continue to maintain compliance with financial covenants in its credit agreements; the Company's reliance on management information systems; successful deployment of point-of-sale and guest relationship management systems; the ability of the Company to retain and attract stylists; labor and benefit costs; legal claims; the continued ability of the Company and its franchisees to obtain suitable locations and financing for new salon development and to maintain satisfactory relationships with landlords and other licensors with respect to existing locations; governmental initiatives such as minimum wage rates, taxes and possible franchise legislation; the ability of the Company to optimize its brand portfolio and integrate salons that support its growth objectives; the ability of the Company to maintain satisfactory relationships with suppliers; financial performance of our joint ventures; risk inherent to international developments (including currency fluctuations); or other factors not listed above. Additional information concerning potential factors that could affect future financial results is set forth in the Company's Annual Report on Form 10-K for the year ended June 30, 2012. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.

REGIS CORPORATION (NYSE: RGS)

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

as of December 31, 2012 and June 30, 2012

(Dollars in thousands, except per share data)

 
December 31, 2012   June 30, 2012
ASSETS
Current assets:
Cash and cash equivalents $ 218,343 $ 111,943
Receivables, net 24,597 28,954
Inventories 153,864 142,276
Deferred income taxes 17,988 14,503
Income tax receivable 13,864 14,098
Other current assets 21,486 55,903
Current assets held for sale   16,816   17,000
Total current assets 466,958 384,677
 
Property and equipment, net 302,756 305,799
Goodwill 463,470 462,279
Other intangibles, net 22,893 23,395
Investment in and loans to affiliates 42,170 160,987
Other assets 62,697 59,488
Long-term assets held for sale   179,959   175,221
 
Total assets $ 1,540,903 $ 1,571,846
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 28,950 $ 28,937
Accounts payable 59,277 47,890
Accrued expenses 140,322 157,026
Current liabilities related to assets held for sale   16,538   18,120
Total current liabilities 245,087 251,973
 
Long-term debt and capital lease obligations 240,033 258,737
Other noncurrent liabilities 160,257 143,972
Long-term liabilities related to assets held for sale   28,781   28,007
Total liabilities   674,158   682,689
 
Commitments and contingencies
 
Shareholders' equity:
Common stock, $0.05 par value; issued and outstanding 56,615,264 and 57,415,241 common shares at December 31, 2012 and June 30, 2012, respectively 2,831 2,871
Additional paid-in capital 334,353 346,943
Accumulated other comprehensive income 26,109 55,114
Retained earnings   503,452   484,229
 
Total shareholders' equity   866,745   889,157
 
Total liabilities and shareholders' equity $ 1,540,903 $ 1,571,846
 

REGIS CORPORATION (NYSE: RGS)

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

(Dollars in thousands, except per share data)

   
Three Months Ended Six Months Ended
December 31, December 31,
2012   2011 2012   2011
Revenues:
Service $ 388,286 $ 404,025 $ 781,702 $ 819,042
Product 108,236 112,900 210,520 219,673
Royalties and fees

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